Machinery Stock Outlook For January 2015

As we stand nearly midway through Jan 2015, things look a bit uncertain for the global economy. The year started with major stock indexes across the globe experiencing falls due to dangerously plunging crude oil prices, coupled with decelerating economic activities in Japan and China. Eurozone is not an exception, as political uncertainties cloud its growth prospects.

If this situation persists, the global economy will suffer a setback on its recovery path. Last October, the World Economic Outlook, published by the International Monetary Fund (“IMF”), highlighted the worsening of operating conditions in some developed and emerging nations. This, consequently, will hurt industrial activities, thus posing a major headwind for the machinery industry.

The IMF revised down its global Gross Domestic Product (“GDP”) forecast by 20 basis points (bps) to 3.8% for 2015. Growth projection for advanced economies was lowered by 10 bps to 2.3%, while that for emerging nations was predicted at 5%, down 20 bps from the previous estimation.

Across nations, the level of industrial activities is measured in terms of industrial production -- output of the manufacturing, mining and utilities sectors. A brief discussion on the prospects of the machinery industry in different nations has been provided below.

Let us first take a look at the performance of the U.S. toward the end of 2014. As per the latest Federal Reserve report, industrial production increased 5.2% from the year-ago month level and 1.3% from the previous month in Nov 2014. The growth was driven by strengthening wood products, machinery, petroleum and coal products, and apparel and leather, food, and plastics and rubber industries.

The job market showed signs of recovery. As per the Bureau of Labor Statistics’ report, 252,000 new jobs were added in December, while the unemployment rate fell to 5.6%.

Also, export demands for the U.S. machinery were quite impressive. According to the U.S. Census Bureau report published in Jan 2015, machinery shipments increased by 5.8% in the eleven months ended Nov 2014. Shipments for industrial and metalworking machinery rose 37.2% and 6.1%, respectively; while the same for farm machinery was down 22.1%. New machinery orders were up 6.9%, while order backlog grew 9.6%.

Presently, market sentiments are shaky in the U.S. as fluctuating currency movements and damper global growth are likely to hurt the country’s export businesses. Falling oil prices add to the woes. Persistent decline in oil price may force oil producing companies to curtail their drilling activities. This may trigger employee lay-offs as well as lower capital spending on purchase of machinery and equipments. However, amid all these, the Fed’s recent decision to not hike rates in the near term came as a breather.

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According to the IMF, the U.S. economy is projected to grow by 3.1% in 2015.

The latest report by Japan’s Cabinet Office shows that total machinery orders in Oct 2014 declined 2.9% over the previous month and came way below 8% growth recorded in September.

Private-sector machinery orders (excluding volatile orders from ships and electric power companies) or core machinery orders were down 6.4%, raising concerns over the future of capital investments by companies. Orders from overseas clients fell 4.6%, while that from the government clients increased 4.8%.

Moreover, the country’s GDP contracted 0.5% in third-quarter 2014 (or 1.9% on an annualized basis) versus 0.6% growth recorded in the year-ago quarter. Consumption demand was weak due to a 3% increase in sales tax in Apr 2014.

The shrinking economy in the quarter compelled the government to delay its second sales tax hike of 2%, by 18 months. Also, the Bank of Japan is likely to opt for another reduction in its GDP forecast for fiscal 2014 (ending Mar 2015).

The IMF predicts the economy to grow by a meager 0.8% in 2015.

China: The country’s industrial production growth rate slowed down to 7.2% in November versus 7.7% recorded in October and 8% in August. The weakness was due to weaker domestic demands as well as factory shutdowns during the period.

Gross Domestic Product growth rate also decelerated to 6.78% in November from 6.91% in October. Exports growth fell to 4.7% while imports shrank 6.7%. To boost growth, the central bank of China slashed its interest rates in November apart from easing loan restrictions.

The country’s economic growth in 2014 is anticipated to lag the government target of 7.5%. Also, the overall economic scenario points toward weak growth in 2015 as well. The IMF projects the Chinese economy to grow by 7.1% in 2015.

India: The country’s industrial production in Oct 2014 decreased 4.2% from the year-ago month. The decline was due to a 7.6% fall in the manufacturing rate, more than offsetting the respective growth rates of 5.2% and 13.3% recorded in mining and electricity sectors. GDP growth in the September-ending quarter slowed down to 5.3% as compared with 5.7% recorded in the June-ending quarter.

However, expectations of strong demand, policy improvements and better monsoon conditions will act as the primary growth drivers for the country, going forward. The newly-formed government has already taken certain measures to successfully boost the country’s foreign capital inflow. According to the IMF, the country is projected to grow by 6.4% in 2015.

Brazil: The country’s industrial production in Nov 2014 declined 5.8% from the year-ago quarter. The fall was worse than the 3.6% decline in October. Also, the country recorded negligible GDP growth of 0.1% for third-quarter 2014.

For 2015, the country projects a gloomy outlook as a result of low private investments, inadequate infrastructure and high labor costs. The IMF has lowered its growth forecast on the country by 60 bps to 1.4%.

However, the country’s efforts to attract more foreign direct investments and expand industries like tourism, steel and electricity, might provide some strength, rekindling the hopes for growth. Also, the Brazilian government’s growth acceleration program will garner capital investments for the development of ports, railroads, airports, wind farms and roads.

The eurozone’s industrial production (excluding construction) in Oct. 2014 managed a 0.1% rise over the previous month while increasing 0.7% year over year, as per Eurostat’s data released in Dec 2014.

According to the VDMA Machine Makers’ Association, German machine tool orders in the Oct.–Dec. period fell 3%. Domestic orders were down 4%, while international orders declined 2%.

The IMF projects the euro area to grow by 1.3% in 2015. The estimate has been revised down by 20 bps from its previous projection. The outlook is quite gloomy, owing to the steep fall of the region’s currency Euro, as a result of the plunging oil prices as well as domestic issues.

In Sep. 2014, the European Central Bank (ECB) stunned the global market by announcing fresh cuts in all interest rates and negative rates on bank deposits. In addition, a stimulus plan, infusing money in the market through purchase of covered bank bonds and asset-backed securities, was also announced. These initiatives are aimed at combating the ill-effects of low inflation in the region.

According to the Zacks Industry classification, Machinery is broadly grouped under the Industrial Products sector, one of the 16 broad Zacks sectors.

More than 260 industries are ranked in the 16 Zacks sectors based on the earnings outlook of constituent companies in each industry. To learn more visit: Analyst Report ).

To Conclude

Given the current scenario, fiscal government expenditures will play a counter-cyclical role by curbing the ill effects of slower economic development. Huge investments in infrastructure projects will boost industrial products demand as well as create new jobs. Such measures, along with emphasis on growing trade relations and implementation of better policies, will be a boon for the machinery industry.

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Written By: Zacks Investment Research